Abstract

In a world with uneven climate policies, the carbon price differentials across regions could shift the production of energy‐intensive
goods from carbon‐constrained countries to ‘carbon havens’, or countries with laxer climate policy. This would reduce the
environmental benefits of the policy (carbon leakage) while potentially damaging the economy (competitiveness concerns). A
review on these questions is provided in this article. First we discuss the main terms involved, such as carbon leakage, competitiveness,
sectors at risk, or climate spillovers. Then we analyze the studies evaluating the carbon leakage risk. Most ex ante modeling studies conclude to leakage rates in the range of 5–20% (if no option to mitigate leakage is implemented), whereas
ex post econometric studies have not revealed statistically significant evidence of leakage. Different policy options to face these
issues are then examined with an emphasis on Border Carbon Adjustments (BCA). BCA consist in reducing the carbon price differentials
of the goods traded between countries. Properly implemented, they can reduce leakage (by around 10 percentage points in ex ante modeling studies) in a cost‐effective way but are controversial because they shift a part of the abatement costs from abating
countries to nonabating countries. Their impact on international negotiations is unclear: they could encourage third countries
to join the abating coalition or trigger a trade war. Besides, their consistency with World Trade Organization (WTO) rules
is contentious among legal experts. WIREs Clim Change 2014, 5:53–71. doi: 10.1002/wcc.245

Conflict of interest: The authors have declared no conflicts of interest for this article.

Images

Sectors classified ‘at risk of carbon leakage’ in Europe. The size of the circles is proportional to the sector emissions. Purple‐shaded area indicates sectors not at risk of leakage according to EC criteria. a: Cement with 0% free allocation (as analyzed by EC), b: cement with 30% free allocation, c: cement with 80% free allocation. (Source: Carbon Trust)